How to set a customer credit limit

Step 1 — decide what to base it on

Set a credit limit from a mix of the customer's creditworthiness — their credit check and recommended limit — and your own risk appetite. A useful sanity check: how much could this customer owe you before a default would seriously hurt? The limit should sit comfortably below that. Never let one account grow large enough to threaten the business.

Step 2 — start conservative for new accounts

New customers are unproven, so start with a modest limit and short terms. Let them earn a higher limit by paying reliably over time. This staged approach lets you build trade with a promising customer without betting on them before they have shown they pay. It is far easier to raise a limit than to recover a debt you should not have allowed.

Step 3 — monitor exposure against the limit

Track how much each customer owes against their limit, and stop supplying on credit when the limit is reached until they pay down. This is the discipline that makes the limit real — a limit you do not enforce is just a number. Watch your aged debtors to spot accounts drifting toward or past their limit.

Step 4 — review limits both ways

Review limits regularly. Reward reliable payers with higher limits and better terms; cut the limit for any customer whose payments slow or whose credit profile deteriorates. A credit limit is a living control, not a one-off decision. Reacting quickly when a good customer turns slow can prevent a manageable debt becoming a bad one.

Step 5 — free the cash within limits

Even within sensible limits, the credit you extend ties up cash. Invoice finance releases it while you keep control of the ledger.

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